Showing papers in "European Journal of Law and Economics in 2007"

Border tax adjustment: a feasible way to support stringent emission trading

Abstract: CO2 emission allowances help to internalise effects of fossil fuel consumption on global climate and sea levels. However, consumption, production and investment decisions do not reach the optimal allocation when the scheme is only implemented in some countries. Production with inefficient facilities in non-participating countries may even increase. Border tax adjustment (BTA) for costs incurred from procuring CO2 emission allowances reduces the leakage. We show that BTA can be both feasible and compatible with World Trade Organization (WTO) constraints. Practicable implementability requires a focus on CO2 emissions from certain processed materials and a separate treatment of electric energy input.

The effect of board size and composition on European bank performance

Abstract: Banks are “special” financial institutions generating distinct corporate governance challenges. The present paper examines the relationship between two of the most pertinent corporate governance factors—that is, the size of the Board of Directors and the proportion of non-executive directors—and firm performance on a sample of 58 large European banks over the period 2002–2004. The empirical analysis embraces a number of bank-specific variables. Our results reveal that bank profitability is negatively related to the size of the Board of Directors, while the impact of Board composition, although positive in all models, is, in most cases, insignificant. The results are robust after controlling for firm-specific variables.

Evaluating the effectiveness of the Spanish police force through data envelopment analysis

Abstract: The aim of this paper is to evaluate the level of effectiveness of the National Police Force in Spain, attempting to show the possibilities that the Data Envelopment Analysis technique offers in this field. Furthermore, we have implemented a two-stage procedure which uses econometric methods to estimate the set of variables which will explain the performance of effective units. The results of our analysis show that there is a high level of investigative effectiveness, which decreases regarding coercive and overall effectiveness. This indicates that although there is logic in the cases solved and the culprits arrested, this cannot be extended, given the level of offences, to the number of cases solved, and to a lesser degree to those arrested for them. The units which are most effective overall are characterized by the solving of crimes against the right to sexual freedom and indemnity and by the arrest of a high percentage of those guilty of other offences.

In search for rules that secure gains from cooperation: the heuristic value of social dilemmas for normative institutional economics

Abstract: We ask how normative statements are possible within an economic theory framework that recognises the importance of institutional arrangements. Instead of applying established outcome-oriented criteria of social welfare, we examine whether the rules of economic interaction allow the acquisition of gains from cooperation. We suggest to reconstruct any interaction as an existing or repealed social dilemma. This approach helps to identify common rule interests which create room for improvement of all parties involved, and to suggest desirable institutional reforms. Our policy applications include the unemployment problem and rural credit markets.

Company survival following rescue and restructuring State aid

Abstract: We study the survival of companies having received rescue or restructuring State aid in the EU. Our analysis is based on a newly constructed dataset on the awards of State aid that were approved individually by the Commission between 1995 and 2003. We first provide a descriptive analysis of the companies that received the aid, of the aid awarded and of the mortality of these firms. We then present a regression analysis that determines the influence of various factors, such as the type of aid and market conditions, on the subsequent survival of aid-receiving companies. We find high mortality among companies who received rescue aid. The amount of State aid and the availability of other aid instruments seem to have no impact on survival. Thirdly, we find evidence that if a company was in a condition of difficulty because of market decline or poor management, such company would be more likely to survive after receiving rescue or restructuring aid.

CO2 emission allowance allocation mechanisms, allocative efficiency and the environment: a static and dynamic perspective

Abstract: The object of this paper is to place allocation mechanisms into a framework of Emission Trading Systems and thereby to establish a typology. It analyses how various assignment mechanisms deal with issues such as price determination, allocative efficiency and environmental considerations in a static and dynamic economy model. It analyses how allocation mechanisms are to be ranked and whether they serve the attainment of the general equilibrium. First the paper examines how market-based allocation mechanisms (auctions) perform in light of the above issues. Second the paper distinguishes between the two types of administrative allocation mechanisms: (1) financial administrative allocation mechanisms, combining payment schemes with bureaucratic expertise, and (2) free administrative allocation mechanisms, based inter alia on industrial policy considerations and on passed emission records (grandfathering). In particular, the value added of relative performance standards, which are for example included in the “Performance Standard Rate” (PSR) Emission Trading System, are examined as a means to provide allowances. The overall finding is that in a closed static economy and in the presence of an efficient trading market, different allocation methods produce equally efficient outcomes in allocative and environmental respects. With regard to an open dynamic economy, the impact of initial allocation mechanisms resembles those of a static closed economy. In such an economy the upper limit to the internalisation of negative externalities is given by operator’s costs of environmentally harmful relocation and hence the cost burden placed upon operators is crucial. Auctions and financial administrative allocation mechanisms perform less well than free administrative mechanisms. Relative standard base mechanisms, constituting an important element of the PSR Emission Trading System, perform better than grandfathering schemes because they take into account abatement possibilities of industries, minimise stranded costs and do not give rise to time shifting of abatement projects. It is therefore concluded that allocation mechanisms merit more attention than the discussion relating to capped trade and trade without a cap.

Market and Institutional Determinants in the Regulation of Conveyancers

Abstract: Demand for law professionals in the conveyancing of property is decreasing because of market and institutional changes. On the market side, many transactions feature large, well-known parties and standardized transactions, which make professionals less effective or necessary for protecting the parties to private contracts. On the institutional side, public titling makes it possible to dispense with a broadening set of their former functions. Recording of deeds made professionals redundant as depositories of deeds and reduced demand for them to design title guarantees. Effective registration of rights increasingly substitutes professionals for detecting title conflicts with third parties and gathering their consent. Market changes undermine the information asymmetry rationale for regulating conveyancing, while institutional changes facilitate liberalizing not only conduct but also license regulations. These arguments are supported here by disentangling the logic of titling systems and presenting empirical evidence from the European and USA markets.

Theoretical foundation for a debtor friendly bankruptcy law in favour of creditors

Abstract: Although many works support creditor friendly bankruptcy laws, an evolution towards debtor friendly systems is at work. This paper proposes a theoretical ground to meet this paradox. It reconsiders the economic role of bankruptcy law by stressing on the courts’ production of information. It reveals that the transmission of a lenient signal by judges makes it possible to reduce the hazard that bad risks seek to avoid going on trial. Thus, it shows that debtor friendly bankruptcy laws are not systematically opposed to creditors’ interests. They reduce the risk of the economy and contribute to the improvement of the global efficiency.

Further notes on information, corruption, and optimal law enforcement

Abstract: We consider two important notes on optimal law enforcement with corruption. First, we analyze the role of asymmetric information on the emergence of collusion between criminals and enforcers. Second, our paper proposes that the optimal criminal sanction for the underlying offense is not necessarily maximal. We achieve this result by coupling the criminal sanction for the underlying offense with a criminal sanction for corruption, both imposed on offenders. A higher criminal sanction for the underlying offense implies that the government must spend more resources to detect and punish corruption (since the likelihood of collusion increases). Thus, the government could reduce this sanction, save on detection, and increase the criminal sanction for corruption (in order to offset the negative effect on deterrence).

The reformers’ dilemma: media, policy ownership, and reform

Abstract: Current proposals for strengthening policy ownership in reforming economies are fundamentally flawed. Modeling the reform process as a prisoners’ dilemma demonstrates that political agents must overcome this conflict of interests before present proposals for bolstering ownership will work. A politically autonomous mass media is one important mechanism enabling political agents to do this. Reforming countries without free media face an uphill battle overcoming the problems associated with transition. We test our theory by investigating the relationship between media freedom, foreign aid, and economic development in 26 post-socialist transition countries. The results of this analysis support our theory.

The strategic use of dismissal legislation: an empirical analysis using Spanish data

Abstract: In this paper, we analyse empirically how the legal framework affects the relationship between labour market conditions and dismissals. We use a pseudo-panel of Spanish data from 1987 to 2001. We find that Labour Law reforms have effects on the use of individual and collective dismissals although such effects are much lower than those related to the business cycle. The results also show a strategic use of the different types of dismissals, distorting the work of those institutions involved in dismissals.

On the economics of plagiarism

Abstract: Cheating and plagiarism can involve the transgression of intellectual property rights across many areas of life. When a direct financial benefit from such practices is identifiable, the opportunity to seek legal redress is available via civil court action. When it is undertaken by a public official it may constitute malfeasance. Yet in the case of breaches of university regulations (from the growing number of student cheating and plagiarism incidents) subsequent legal intervention may be characterised by situations where the university is the defendant and the alleged plagiarist is the plaintiff (seeking compensation for interrupted study and/or tarnished reputation). University defences can flounder around the issue of proving intent to deceive. What can they do to try to prevent such occurrences? This paper uses economic analysis to examine such issues. Economic models of plagiarism motivated primarily by (i) time-saving and (ii) dishonesty are developed to help frame the discussion. Both model approaches overlap in their implications, namely, ensuring that sufficient resources are devoted to monitoring coursework (to increase the probability that cheating and plagiarism are detected) and of providing sufficiently clear and severe institutional penalties (to counter-balance any expected benefits that the student may perceive to be available from cheating and plagiarism). Policy proposals are raised for further debate and consideration.

The European airline industry: law and economics of low cost carriers

Abstract: This article offers an analysis of the European airline industry in order to understand the new dynamics of the competitive field. The liberalization process did not lead the entrance of competitors similar to incumbents, but a new organizational model has been developed, the one of low cost carriers. The incumbents’ reaction to the liberalization process coupled with the entrance of low cost companies into the sector are hence considered. Two theories are analysed: the contestable markets theory, to understand the theoretical vision that has influenced the liberalization process, and the core theory, a modern approach to the concept of destructive competition that, according to some authors, is a recurring problem in the sector. While numerous barriers to entry still exist, the paper examines how the organizational model of low cost companies has helped new entrants to overtake these obstacles. By the same token, the application of the core theory does not seem to justify strategic alliances taking place in these years. The competitive framework is definitely clearer if we analyse sector changes in a different way, from the point of view of low cost companies considered as new market actors.

Industrialists hand in hand with environmentalists: how eco-labeling schemes can help firms to raise rivals’ costs

Abstract: Industrialists may promote eco-labeling schemes in order to gain the support of environmentalists and ultimately gain market protection. Beyond the environmental effects of such coalitions, these schemes can provide industrialists a legitimate way to disadvantage rivals, frequently foreign rivals, by raising their costs. We consider a Stackelberg model that determines the conditions under which a domestic firm has incentive to impose an eco-label in order to raise the costs of its foreign rivals. The effects of eco-labeling on domestic social welfare are ambiguous. Policy recommendations are drawn. Notably, factors that may help policy makers to identify situations more vulnerable to undesirable outcomes from a welfare viewpoint are developed.

Environmental voluntary behaviour and crowding-out effects: regulation or laissez-faire?

Abstract: The purpose of this paper is to investigate what the consequences are if environmental regulation in terms of a price mechanism (effluent charges) erodes moral motivation (crowding-out). The findings suggest that a regime relying on voluntarism can do better than a mandatory regime depending on the number of individuals being intrinsically motivated, degree of moral motivation, crowding effects, and whether or not ethical utilities are accounted for. The optimal tax scheme is a discriminatory one with rates that differ across moral and non-moral individuals. This tax-scheme induces the first-best solution when social costs are considered, while the same solution becomes unattainable for a social welfare function. The model provides a rationale for why governments sometimes rely on voluntary effort.

Family-owned, limited close corporations and protection of ownership

Abstract: Protected ownership and freedom of contracts are two basic parts of the institutional framework of successful countries according to Douglass North, winner of the Nobel Prize in 1993. The incentives to make long-term investments are strengthened if ownership rights are protected and freedom of contracts is a basic element in the process of efficient allocation of scarce resources. An important engine in prosperous societies is the family firm. Most companies in these societies can be classified as family firms and a major part of GDP is produced by family businesses. Consequently, how ownership is protected in family firms is an important issue.

Economic analysis of standard form contracts: the monopoly case

Abstract: The terms of standard form contracts are rarely known to consumers. Still, it is often argued that few consumers who read and understand the contract can assure that it does not include sub-optimal terms. According to this argument, if the proportion of informed consumers is sufficiently high, they can secure an optimal set of contract terms to the benefit of all other consumers. This paper shows that when suppliers can adjust the content of the form contract, the few reading consumers cannot correct the market failure. In fact, unless all consumers read and understand the form contract, a monopoly is always encouraged to offer sub-optimal terms, i.e., terms that benefit her but at a higher cost to the consumers.

Bureaupreneurs in China: we did it our way

Abstract: This article explores the different and sometimes conflicting explanations of the success of the collective enterprises (town–village-enterprise) in China during the first phase of transition (1979–1995). It is argued that explanations, relying on cultural variables are not sustainable and this for two reasons. First, the importance of the collective enterprise is shrinking while the private sector is clearly on the rise. Second, other factors, referring to characteristics of the local and central political, administrative and economic environment, in which the Chinese enterprise has to (had to?) operate, provide for a sufficient explanation of the peculiar structure of the Chinese collective enterprises. These enterprises are seen as the result of ‹bureau-preneurship’ because local bureaucrats were integrated in their management in order to pre-empt predatory behaviour and to facilitate the relationships with the central institutions. The article contributes to the property rights’ theory of the firm as it analyses an empirically very important case in which firms with unclear property rights and structures, apparently not conducive for incentives, might still be the most efficient option.

The evolution of European legal integration

Abstract: This article contributes to the development of theories on European integration by testing and exploring statistical models on the long-term development of legislative activity of the European Commission. Drawing on legal information gained from the European Union’s PreLex database and analyzing it with the help of statistical analyses, we map out growth patterns of EU law between 1976 and 2003. We construct time-series models and models based on non-linear regression. While the performance of models based on the traditional theoretical approaches, intergovernmentalism and neo-functionalism, is rather poor, the analysis suggests that nonlinear dynamic models might be an interesting avenue for future conceptualizations of the EU integration process.

Consumer credit information systems: a critical review of the literature. Too little attention paid by Lawyers?

Abstract: This paper reviews the existing literature on consumer credit reporting, the most extensively used instrument to overcome information asymmetry and adverse selection problems in credit markets. Despite the copious literature in economics and some research in regulatory policy, the legal community has paid almost no attention to the legal framework of consumer credit information systems, specially within the context of the European Union. Studies on the topic, however, seem particularly relevant in view of the establishment of a single market for consumer credit. This article ultimately calls for further legal research to address consumer protection concerns and inform future legislation.

Managerial incentives and access price regulation

Abstract: Policy makers have identified the non-discrimination principle as a key instrument to regulate vertically integrated firms in control of upstream bottlenecks. It has been argued that the non-discrimination principle may create a level playing field, but at the expense of higher consumer prices. However, this rests on the assumption that the firms do not respond strategically to the regulation. We show that a non-discrimination requirement makes the vertically integrated firm behave more aggressively. Consequently, non-discrimination regulation rarely creates a level playing field. Neither does it necessarily increase end-user prices. Indeed, we show that end-user prices may fall.

A note on judgment proofness and risk aversion

Abstract: Shavell (Int Rev Law Econ 6:45–58, 1986) established that potentially judgment-proof injurers will take less care than injurers with sufficient funds in the case of strict liability. This note considers strict liability and shows that the reverse may hold if individuals are risk averse, i.e., some potentially judgment-proof injurers expend more on care than some injurers with assets greater than the harm.

The peculiar case of age discrimination: Americanising the European social model?

Abstract: The Lisbon Strategy commits the EU to making labour market regulation more employment friendly with commentators anticipating some resulting convergence on the US model. Surprisingly, part of this post-Lisbon convergence has taken the form of a major extension of EU Social Policy with the expansion of anti-discrimination policies to address the case of age discrimination. We argue that unlike the US experience, it is the current preoccupation with raising European employment rates that has led to this expansion of ‘hard law’ Social Europe. We are unable to provide an efficiency rationale for this extension and assess alternative explanations. We also provide arguments suggesting that its impact is likely to differ from those experienced in the US.

A note on exogenous changes in incentives for and deterrence of corruption

Abstract: In this note we amend the model elaborated by Acemoglu and Verdier (2000, The American Economic Review, 90(1),194–211), to examine how agents respond to an exogenous change in incentives. In particular, we apply the theoretical framework to the consequences on the corruption level in Italy of a famous sentence of the Italian Corte di Cassazione in plenary session: in this sentence, no. 500 of 1999, a revolutionary interpretation of the law has increased the area of civil liability for both the public administration and bureaucrats. This is one of the few cases in which the judge substantially legislates in a system of civil law, and the modification in incentives towards or away from corruption comes from an authority that is not part of the game.

The economics of environmental law enforcement: end-of-life vehicles

Abstract: Abandoned End-of-Life Vehicles (ELVs) have been an environmental concern for a long time in a number of countries. This article examines different ways to address the issue by changing the incentive structure for agents. Following (Polinsky A. M., & Shavell, S. (2000). The Economic theory of public enforcement of law. Journal of Economic Literature, 38, 45–76.) a model is used to compare a fine-based system with a deposit-refund system; a combination of the two is then considered. It is shown that when the environmental harm is relatively low and constant, a deposit-refund system is preferred. When cases of high environmental harm are included, the optimal choice would be a combined system.

Investigating the determinants of pretrial settlement rates: contingent versus non-contingent lawyers’ fees

Abstract: In this article, we explore the possibility that the percentage of litigations settled outside of court is affected by the degree of contingency of lawyers’ fees. In our view, a litigation is a game where not only the plaintiff and the defendant, but also their lawyers are independent players. The main consequence of this assumption is that the authority to settle is allocated endogenously to either the clients or their lawyers, depending on the value of the relevant parameters. In this game theoretical setup, (1) we compare the incentives to settle provided by contingent and non-contingent lawyers’ fees, and (2) we state the conditions under which settlement is more likely to happen.

A comparison of the Russian 13% flat rate PIT evasion stratified contributions and the US tax schedule

Abstract: The empirical study of Russian Personal Income Tax (PIT) evasion proves the existence of middle-class high-income groups able to finance the state but which lack a sufficient tax compliant attitude. The size of their income almost functionally positively correlates with tax evasion preferences. Within the flat rate the largest contribution to the general evasion in terms of hidden income comes from the middle-class groups and not from the richest Russians or the upper-middle class. The flat 13% PIT rate compared to the US IRS progressive schedule, both in case of absence and presence of tax evasion, is less favorable in terms of budget revenue and social justice. It is concluded that a positive outcome of flat rate introduction can be only achieved if the tax discipline of 10% of the richest citizens improves considerably. If the tax evasion preferences of the population remain the same, the introduction of a flat rate will hinder budget revenue and tax contribution redistribution.